Suppose you just received that lovely letter from the IRS telling you that you are the subject of an IRS audit.
What one record receives special attention? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records?
Think of the record people most hate keeping. That’s the one we are talking about. You have probably guessed what that record might be.
Red-Flag Record for the IRS Examiner
Once your audit examination begins, the examiner likes to see this record. If the record is missing or lacking, the IRS examiner knows that your other records probably are lacking, too.
This record—the one you probably hate keeping—is the mileage log on your vehicle or vehicles.
The IRS notes that a taxpayer’s failure to keep a mileage log on vehicles indicates that the activity under examination is not being conducted in a businesslike manner.
The Courts Crush Taxpayers Who Fail to Keep an Adequate Mileage Log
In Martin, the IRS disallowed Mr. and Mrs. Martin’s auto and travel expense deductions of $9,185; $30,807; and $41,627 (for 2012, 2013, and 2014, respectively). The IRS noted that the Martins failed the mileage log and travel substantiation requirements of tax code Section 274(d).
Under this tax code section, the IRS says in its regulations that substantiation of vehicle use and travel expenditures by adequate records requires the taxpayer to maintain an account book, a diary, a log, a statement of expense, trip sheets, or a similar record prepared contemporaneously with the use or expenditure and documentary evidence (e.g., receipts or bills).
The IRS considers a mileage log that is kept weekly as contemporaneous for this purpose.
To substantiate their auto expenses, the Martins submitted mileage logs to the court that appeared to show how many miles they traveled each week but not the individual dates of travel or the places to which they traveled.
Because of the failed mileage log and no proof of travel, the court agreed with the IRS and denied the Martins their $81,619 of claimed auto and travel expense deductions. (Ouch.)
Bad mileage logs not only tell the IRS to dig deeper into your records (and pockets) but also cost you your vehicle deductions.
Do as the Tax Form Says
As a one-owner or husband-and-wife-owned business, regardless of whether it’s a corporation, a partnership, or a proprietorship, you file a tax form that asks you for the following information about your vehicles:
1. Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
2. List your total business/investment miles on each vehicle.
3. List your total commuting miles on each vehicle.
4. List your total personal miles on each vehicle.
IRS Form 4562 has columns for answers to the above questions for up to six vehicles used by either a sole proprietor or an owner of more than 5 percent of a corporation, a partnership, or another entity.
The mileage log is the record of proof that you need to use for your answers to the tax form questions.
Beware of Bad Logs
You can find far more bad mileage logs than good ones, including paper logs, online and phone apps, and even GPS models you install in your vehicle.
The good mileage log meets the requirements to complete the IRS forms and prove those numbers. This requires two things on your part:
- Knowledge of the mileage rules
- Keeping a mileage log
Just because it’s called a “mileage log” does not mean that recording your mileage in that log would stand up to an IRS audit. The Martins kept logs, but those logs failed to give them a single penny in vehicle deductions because the logs were missing business destinations and purposes.
Do What the Audit Would Require
Above, we said to do as the IRS form says. For additional clarification, it is good to know what information the IRS, in a correspondence audit, requires you to provide related to that tax form:
1. Send copies of repair receipts, inspection slips, and other records showing total mileage for the year.
2. Send copies of logbooks and other records to support the business mileage claimed.
3. Provide a copy of your appointment book or calendar of business activities for the year.
4. If you are claiming actual expenses, provide copies of paid bills, invoices, and canceled checks for automobile expenses. These would include gas, oil, tires, repairs, insurance, interest, tags, taxes, parking fees, and tolls.
5. Send a copy of the bill of sale or other verification to establish your basis in the vehicle, including the trade-in of another vehicle.
Note that the IRS is looking for
- a match of the repair bill odometer reading with the mileage in your logbook;
- a match of the inspection slip odometer reading with the mileage in your logbook;
- the mileage between repair stops, to see whether that ties in with your claimed mileage; and
- a business purpose that ties in with your appointment book or other calendar of business activities.
Elements of the Perfect Log
Why strive for perfect? Because frankly, it takes only a few minutes extra for the perfect log, and that makes a huge difference in an IRS audit.
Take a look at this record to see perfection in action:
Note what this record does. It accounts for the miles driven on a daily basis, broken down into the required components of investment, business, personal, and commuting miles.
The BusResidRental category is used to record residential rental property mileage if your residential rental or rentals do not rise to the level of a business. To see if your rental or rentals rise to the level of a business, check out Good News: Most Rentals Likely Qualify as Section 199A Businesses.
If you have rentals that don’t rise to the level of a business, your non-commuting mileage to and from the rentals counts as “production of income” mileage, meaning that it adds to your vehicle deductions. It’s just not mileage you can count for the business use requirement of more than 50 percent for Section 179.
The perfect record identifies business and personal stops. Note the grocery store stop on the way home from the office. It was not out of the way, so it generates no personal mileage. The log answers this question that an IRS examiner would ask: “Why don’t you have any personal miles getting groceries?”
For some taxpayers, grouping stops is appropriate. For example, a real estate sales professional who shows one prospect six properties during one trip might make a single entry such as “Showed Jim Smith seven homes in the Wesley Heights section of Washington, D.C.”
You should enter stops where you shop for office equipment and supplies. If you buy an item, the receipt corroborates the stop.
Note how this log identifies the vehicle driven, as this businessperson has more than one business vehicle, and how it corresponds with appointments and business activity.
The entries above contain the beginning and ending odometer readings. Why? To ensure that your record is perfect. These readings tie to your repair bills, inspections, and oil change receipts.
FREE Mileage Log for You
We have taken the daily page from our Tax Diary System, modified it slightly, updated it for the Tax Cuts and Jobs Act, and formatted it to standard paper size for your use. To access your free copy of this mileage log, click here to open the PDF, and then save it to your computer.
To make your mileage recording even easier, we also took the summary pages and put them in an Excel
spreadsheet for your use. To access your free Excel spreadsheet, click here to open the file, and then save it to your computer.
Show Me the Log
If you would like to see a short PowerPoint video on keeping the mileage log shown above, click here.
Keep the Mileage Log Weekly or More Frequently
The IRS says that “a log maintained on a weekly basis, which accounts for use during the week, shall be considered a record made at or near the time of such use.”
Use the one-week standard on your mileage log to ensure compliance with the substantiation-by-adequate-records requirements. But frankly, doing this daily is quicker; it takes just minutes and saves time over the weekly method.
Apps, GPS, and Software
You can find various mileage log apps, including those that will integrate with your GPS or vehicle odometer. We checked out some software, GPS integrations, and phone apps developed for this purpose.
The ones we looked at help, especially with the mileage between stops and to and from destinations, but they don’t automatically do the job, because you have to note your business reasons for the mileage.
If you do use an app or a GPS system, you likely have to download the results to Excel and then add the necessary notes. For those of you with tech smarts, that’s likely easy, but make sure to do this on a timely basis.
Also, make sure your entries tie to your appointment book and other corroborative evidence, such as the date on the repair bill.
If you want to avoid big trouble during an IRS audit, keep a good mileage log. This takes just minutes a day.
The mileage log is often one of the first records that an IRS examiner will look at. A good mileage log shows that you know the rules and you respect them. We have seen dozens and dozens of IRS audits end favorably and quickly upon presentation of a good mileage log.
On the other hand, the bad mileage log can turn your IRS examiner into an 800-pound gorilla.
Think of it this way: your mileage log gives you the choice to get in and out of the IRS audit quickly and with your wallet or to spend time with an 800-pound gorilla.